Peruvian ABS in Economic Transition

Similar to the political turmoil which has stalled the Argentine securitization market (ASRI 11/6/2000 p.1), Peru's recent web of scandal and upheaval will hinder that country's structured finance sector as well, analysts say.

But unlike Argentina, where the securitization market has been up and running for quite some time, there have only been a handful of cross-border transactions out of Peru and there has been little action in the local market. Peru, much smaller than Argentina, has merely established a foundation upon which the market can grow.

After nearly a year of chaos, President Alberto Fujimori has said he will hold presidential re-elections in April and he will not be a candidate. This announcement, in conjunction with the bribery scandal involving the head of intelligence services, Vladimiro Montesinos, and the evidence that arms were sold through Peru to the Colombian guerrillas, have rocked the stability of the country.

"Whenever a system is corrupted and once the crack starts to show, then it can unravel. The Fujimori system is falling apart," said Bruno Boccara, sovereign analyst for Standard & Poor's Rating Services.

Although Peru is facing some challenges at the moment, Boccara says it will continue to grow. "It still grows. We expect there will be growth but not as much as there would have been. There has been an impact on revenue and foreign investment has plummeted," said Boccara.

The uncertainty of the country has caused concern for many investors and analysts. S&P has lowered the sovereign rating on Peru from BBB-minus to BB-plus.

Additionally, Fitch has placed Peru's BB rating on a rating-watch negative. "We're not actually thinking of downgrading, but we are just saying that things are in a transition state and potential creditworthiness could be deteriorating in the near term," said Therese Feng, associate director who analyzes Peru at Fitch. "As long as there is some kind of creditworthiness situation, I can't guarantee what rating action we will actually do, whether it will stay on this or it will take a rating action positive or negative."

Moody's Investors Service currently has the country rated Ba3 and was not available for comment on whether it will also change its outlook on Peru.

"If you think about different stages of life, most countries [in Latin America] are in the infant stage, in which the easier transactions to do are cross-border," said one analyst. "Once you develop the regulatory and the legal framework that's necessary, you can move into the next stage which includes local transactions, which Chile and Argentina are the bigger ones."

So what will become of the securitization foundation in Peru? "I don't think [the foundation] has been destroyed," said the analyst.

In fact, there is one transaction coming out of Peru that some sources say is expected to close in the next couple of weeks. Banco de Credito del Peru (BCP) is securitizing electronic remittances (ASRI 3/13/2000 p.7, 6/5/2000 p.9).

The transaction, originally scheduled to close in April and then June, has not been completed yet as a result of the political turmoil and the structuring of the deal, according to sources. The deal is still expected to receive triple-A ratings from S&P and Moody's Investors Service.

"The problems are just going to slow the development of the market. I think that future transactions may be a bit difficult to put together or to place just because of people's viewpoints of recent actions in Peru in terms of the political changes that are happening there," the analyst said.

According to Fitch's Feng, the fiscal deficit in Peru is currently around 2.8% and could increase this year. "And next year, it looks like things will probably be pretty rough as well because of the increased spending due to elections, and they are going to have trouble meeting the gap because of a slowdown in investment," Feng said.

To meet the deficit, Feng offered two options: local issuance and multilateral lending. "The thing with local issuance is that it might be kind of expensive. So that's why I think they may prefer to go for multilateral lending, although this is simply speculation on my part," Feng said.

With the exception of the BCP deal, the securitization market in Peru is at somewhat of a standstill. "After the new president comes on board, people will have a better view of what's actually happening in the country and then from there I think you'll have more issuer and investor comfort for potential transactions," the analyst said.

As to when the structured finance sector will pick up, "There's not going to be a flood coming in, that's for sure. It's hard to say because Peru always comes up with a transaction once in awhile, and I think if one or two transactions come through next year, it will be lucky," the analyst said.

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